The Kremlin – 100 – Playbook 2: The Enablers Case Study Romania Ever since its independence in 1878, Romania has been at political odds with Russia. Divisions deepened in 1940 when Moldova, then part of Romania, became a So­ viet republic. During the Cold War, Romania’s communist path diverged from Moscow’s under the leadership of authoritarian ruler Nicolae Ceausescu (in power from 1965 to 1989), who emphasized national production and self­sufficiency to limit Romania’s re­ liance on Soviet industries. And though both countries are majority Orthodox, they have a different language and they respond to different Patriarchates (Constantinople for Ro­ mania and Moscow for Russia), limiting Russia’s cultural reach into Romania. For these reasons, Romania’s cultural and historical ties to Russia are much less developed than its Central and Eastern European Slavic counterparts. It is less economically dependent on Moscow and is the third most energy independent country in the European Union. Romania also asserts its independence against the Kremlin’s foreign and security policy agenda more prominently: it has been a strong proponent of sanctions against Russia since 2014, hosts part of NATO’s ballistic missile defense system, and is home to a U.S. forward operating air base strategically located on the Black Sea, Mihail Kogalniceanu, which hosts on average between 500 and 700 U.S. troops. Despite these longstanding differences, which have hampered unfettered Rus­ sian influence in the country, some economic and cultural connections have remained and others been made in recent decades through economic activity and the Orthodox Church. Romania’s weak institutions and rampant domestic corruption remain key weaknesses, providing opportunities for Russian companies to exploit local vested in­ terests, particularly those related to privatizations and acquisitions. Indeed, of all the Kremlin Playbook (1 and 2) case study countries, Romania’s corruption score rivals only that of Serbia, Montenegro, and Bulgaria. Even after joining NATO in 2004 and the Euro­ pean Union in 2007, Romania has continued to be plagued by high levels of corruption Heather A. Conley, Donatienne Ruy, Ruslan Stefanov, Martin Vladimirov Stefanov, Ruslan Ruy, Donatienne A. Conley, Heather and limited reform to its judicial system. At the time, the European Union created a veri­ fication mechanism to oversee the government’s efforts to improve its governance and rule of law and has maintained it to this day, judging progress to be insufficient.1 Governance standards and corruption in Romania gradually improved after the country’s accession to the European Union in 2007 until 2016, during which more than a thousand high­ and mid­level politicians and businessmen (including a former prime minister) have been indicted on corruption charges. In 2015, the whole government re­ signed under pressure from large public demonstrations following a deadly nightclub 1 The Cooperation and Verification Mechanism was created to help Bulgaria and Romania bring their rule of law systems up to the EU standards, as these were deemed insufficient at the time of the two countries’ accession to the European Union in 2007. As of February 2019, it has still not been lifted. – 101 – fire and accusations of corruption. Since then, these improvements have ground to a halt despite the work of Romania’s National Anticorruption Directorate (DNA), which has pursued high­profile corruption cases. The DNA has been a critical element in stemming systemic corruption in the country and has weathered frequent attempts to impede its investigative and prosecutorial work by the ruling Social Democratic Party (PSD, a fre­ quent subject of the Directorate’s investigations). However, the government managed to dismiss the DNA’s chief prosecutor in 2018 after two years of political and legal disputes.2 Following national trends, local democratic governance has also worsened since 2016.3 Over the past twenty years, the close interaction between state­owned enter­ prises and politicians that reinforces corruption in Romania has produced a number of non­transparent procedures that can open the door to unintended interferences. One of the prime examples has been the privatization of Rompetrol. The deal was followed by a controversial debt cancellation (of more than $600 million) that was viewed by the press and experts in Romania as a favor to Romanian businessman Dinu Patriciu, and the company that took over Rompetrol after Patriciu also benefited from favorable takeover conditions that experts believe did not match the economic needs of the state.4 The poor health of Romanian institutions overseeing mergers and acquisitions or pri­ vatization deals also allows Russian investments to enter Romania at low cost and offer preferential treatment for local companies and Russian conglomerates like Gazprom. And though some Russian investments in Romania were not always successful—in part because of inexorable industrial decline—Russian individuals and firms have successful­ ly penetrated certain important sectors of the economy. Over the past decade, bilateral trade between Romania and Russia has been muted at below 2 percent of total Romanian foreign trade, though important Russian investments have been made in such strategic sectors as mining and metallurgy. Russia is Romania’s 11th largest trading partner, with exports to Russia rising until 2014, and Russia’s corporate footprint in Romania in 2016 was 1.5 percent of Romanian GDP. But while official data shows inward FDI stocks into Romania from Russia reached only €139 million in 2016, or 0.2 percent of total inward FDI stocks, the real figures are likely higher if Russian subsidiaries registered outside Russia are included (over 82 percent of the turnover of companies with Russian ultimate beneficial ownership in Romania is made through companies registered in the Netherlands).5 For example, Lukoil’s fuel distribu­ 2 Radu­Sorin Marinas, “Romania’s president removes chief anti­corruption prosecutor,” Reu­ ters, July 9, 2018, https://uk.reuters.com/article/uk­romania­corruption/romanias­pre­ sident­signs­decree­to­remove­chief­anti­corruption­idUKKBN1JZ0MK. Case Study - Romania Case Study 3 Laura Ștefan, Sorin Ioniță, and Septimius Pârvu, Nations in Transit 2018, Romania – Country Pro- file (Washington, D.C.: Freedom House, 2018), https://freedomhouse.org/report/nations­tran­ sit/2018/romania. 4 Claudia Pirvoiu, “Cum a renuntat Guvernul, de doua ori, la datoria Rompetrol de 600 de milioane de dolari, in schimbul unor promisiuni,” Hotnews, May 10, 2016, https://economie.hotnews.ro/ stiri­companii­20987882­cum­renuntat­guvernul­doua­ori­datoria­rompetrol­600­milioane­do­ lari­schimul­unor­promisiuni.htm. 5 CSD calculations based on data from Corporate Registers and Databases. The Kremlin – 102 – Playbook 2: The Enablers tion business accounted for €2 billion out of the total of €3.5 billion in revenues in 2016 for all Russian companies registered in Romania.6 This small footprint hides a few large Russian industries that also account for concentrated pockets of local employment, creating dependencies at the local level. The focus of Russian economic activity in Romania has been largely limited to the energy and metallurgy sectors. In some cases, fruitful investments have been determined by a long­term regional strategy: for example, in its initial investment in 1998, Lukoil ac­ quired Romanian energy company Petrotel, which today accounts for around 20 percent of Romania’s total refining capacity (this was coupled with, among others, the acquisition of the second­largest retail fuel supply chain in Serbia). Other acquisitions were less suc­ cessful and more opportunistic, focused on Romanian plants that struggled to achieve profitability (sometimes burdened with previously­accumulated debt) or later succu­ mbed to the 2008 global financial crisis. These acquisitions sometimes failed to produce returns on investment, leading to bankruptcies and plant closures. Such was the case of Russia’s Mechel acquisition of steel plants in Romania, which later left the state inca­ pable of recovering outstanding arrears.7 In 2005, Russian businessman Vitaly Mashitsky’s Vimetco, an aluminum producer registered in the Netherlands, acquired 84 percent of ALRO Slatina, Romania’s largest aluminum producer. The same year, it acquired another aluminum company, Alum Tulcea, and consolidated its quasi­monopoly status on the domestic market. ALRO is also one of the largest heat and gas consumers in the country, accounting for about 6 percent of Romania’s total energy consumption in 2016. In 2012, Lukoil obtained a concession on two extraction blocs in the Black Sea in a joint bid with Vanco International LTD (although Romgaz subsequently bought a 10 percent stake in the blocs). The oil giant has run into legal issues with its subsidiary in Romania; it was investigated for a transfer pricing and tax evasion scheme through Pe­ trotel Lukoil, a case in which the prosecution went after €1.7 billion in asset seizure. The case was dismissed for lack of evidence (and poor prosecution) but part of the file was resubmitted, concerning a much smaller prejudice of €1.7 million, and is still ongoing.8 The Romanian gas sector has provided important economic rewards for Russia’s Heather A. Conley, Donatienne Ruy, Ruslan Stefanov, Martin Vladimirov Stefanov, Ruslan Ruy, Donatienne A. Conley, Heather economic giant Gazprom. Prior to 2013, it had a virtual monopoly on Romanian gas im­ ports, representing between 20 and 30 percent of the total market (domestic suppliers Romgaz and Petrom accounted for the other 70 to 80 percent). Gazprom benefitted from its long­term contracts with intermediaries Conef Gaz and WIEE, the latter of which became a Gazprom subsidiary after asset swaps in 2015, and both of which signed 23­ 6 Ibid. 7 “România furată. Cazul Mechel – cum au ajuns rușii să controleze mare parte din siderurgia ro­ mânească,” Digi24, January 6, 2015, https://www.digi24.ro/special/campanii­digi24/romania­fu­ rata/romania­furata­cazul­mechel­cum­au­ajuns­rusii­sa­controleze­mare­parte­din­siderurgia­ romaneasca­343777.